Here's Why We're Wary Of Buying Kyoshin's (TSE:4735) For Its Upcoming Dividend

Readers hoping to buy Kyoshin Co., Ltd. (TSE:4735) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Thus, you can purchase Kyoshin's shares before the 30th of May in order to receive the dividend, which the company will pay on the 26th of August.

The company's next dividend payment will be JP¥7.72 per share. Last year, in total, the company distributed JP¥7.72 to shareholders. Looking at the last 12 months of distributions, Kyoshin has a trailing yield of approximately 2.1% on its current stock price of JP¥367.00. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for Kyoshin

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Kyoshin paid out 99% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out 7.0% of its free cash flow as dividends last year, which is conservatively low.

It's good to see that while Kyoshin's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if this were to happen repeatedly, we'd be concerned about whether the dividend is sustainable in a downturn.

Click here to see how much of its profit Kyoshin paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Kyoshin's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 38% a year over the past five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Kyoshin has delivered 3.8% dividend growth per year on average over the past 10 years. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Kyoshin is already paying out 99% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

Final Takeaway

Is Kyoshin worth buying for its dividend? It's never great to see earnings per share declining, especially when a company is paying out 99% of its profit as dividends, which we feel is uncomfortably high. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

With that being said, if you're still considering Kyoshin as an investment, you'll find it beneficial to know what risks this stock is facing. Our analysis shows 5 warning signs for Kyoshin that we strongly recommend you have a look at before investing in the company.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.